Question

As an elected official, you have been informed that real GDP is below its potential and that action should be taken to encourage economic growth and bring the economy to its long-run equilibrium. The marginal propensity to consume is 0.6, and the amount of new government spending is $700 billion. What is the multiplier? Compute this to the first place beyond the decimal.

Answer 1

2.5

Explanation:

Relevant Data provided

Marginal propensity to consume = 0.6

The computation of multiplier is shown below:-

Multiplier = 1 ÷ (1 - Marginal propensity to consume)

= 1 ÷ (1 - 0.6)

= 1 ÷ 0.4

= 2.5

Therefore for computing the multiplier we simply applied the above formula with the help of dividing 1 by marginal propensity to consume and after the result we divide the 1 by the result.